I’ve heard of Schedule C “hobby loss” rules — what happens if my expenses are more than my sales?

You invested heavily in supplies and booths, but sales were lower than expected. You are unsure if you can claim the loss.

The IRS uses a set of guidelines to determine whether an activity is carried on for profit (a business) or for recreation (a hobby). While a common rule of thumb involves making a profit in three out of five consecutive years, the IRS actually considers a variety of factors to determine intent. If an activity is classified as a hobby, tax regulations often significantly restrict the ability to deduct expenses. Maintaining detailed financial records is one way vendors demonstrate a “profit motive.” For a definitive determination, vendors may want to review the IRS “Hobby Loss” rules or consult a tax advisor.

Keep business records, track marketing efforts, and document your intent to make a profit. If losses continue, consult a tax professional to ensure proper treatment. Clear documentation helps support your classification.